When Family Becomes Liability: SEBI Eyes Trading Window Freeze for Relatives of Designated Persons

[Tejas is a student at Symbiosis Law School Pune.]

On 7 February 2025, the Securities and Exchange Board of India (SEBI) dropped a consultation paper, inviting comments on its proposal to extend the automated trading window closure to “immediate relatives” (IRs) of designated persons (DPs). While intended to simplify compliance and curb accidental violations of Prohibition of Insider Trading (Prohibition of Insider Trading) Regulations 2015 (PIT Regulations), the move opens a Pandora’s box—how exactly do you define an IR in modern times? With nearly 50% of all households in India being nuclear or financially independent, enforcement could become a family drama, leaving companies and boards to play judge, jury, and genealogist.

Clause 4(1) of Schedule B, read with Regulation 9 of the PIT Regulations, prohibits DPs and their IRs from trading during the trading window closure. In August 2022, SEBI introduced a framework to freeze DPs' PAN at the security level during closure periods, enforced by stock exchanges and depositories. Initially applicable to NIFTY 50 and SENSEX companies, this framework was extended to all listed entities in July 2023. The current circular proposes further extension to include IRs of these DPs under the same automated mechanism.

Understandably, the regulatory intent is to strengthen compliance by closing potential loopholes through the automatic freezing of PANs linked to IRs during trading window closure periods. However, the author argues that the broad and non-exhaustive definition of IRs under Regulation 2(f), which hinges on subjective tests like "financial dependence" or being "consulted for trading decisions", introduces practical complications. 

Second, the extension may result in over-inclusion of individuals without clear financial or consultative ties to DPs, leading to compliance fatigue and privacy intrusions. This is particularly problematic where familial relationships are strained, legally dissolved, or economically independent, yet still fall under the compliance ambit. The absence of standardized thresholds or objective criteria for assessing financial dependence or consultation habits could render enforcement highly circumstantial.

How Annexure A of the Paper Gives Procedure for Population of Data of IRs of Designated Persons

Steps	Detailed Procedure
Step 1: Portal Access	The designated depository (DD), appointed as per SEBI Circular dated 28 May 2018 provides portal access to the listed company as the first step.
Step 2: Auto- Population	The DD needs to auto-populate critical data fields, including PAN, name, demat account number/DP ID, and client ID of DPs and their IRs, drawing from the system-driven disclosures pursuant to SEBI circular dated 9 September 2020.
Step 3: Verification	Then, the listed company is mandated to verify and update details such as listed ISIN of equity shares, PAN, and demat account particulars of DPs and their IRs, ensuring accuracy for smooth implementation.

Further, the listed company is obligated to specify the trading window closure period, including commencement and end dates on the platform, particularly ensuring that for financial results, the commencement date is the first day after the end of every quarter, and the end date is 48 hours post-disclosure of results. For example: if ABC Limited's quarter ends on 31 March 2025, the trading window closure would commence on 1 April 2025 and end 48 hours after announcing results, say on 17 May 2025.

These details must be provided at least 2 trading days (T-2 days) before the closure commencement date. Subsequently, the DD is required to furnish these specifics to stock exchanges and other depositories at least one trading day (T-1 day) before the closure period, with daily updates during the period.

The depositories are tasked with identifying demat accounts of IRs based on PAN (sole/joint holders) and, based on the listed company's instructions, restrict off-market transactions and pledge creation, tagging them with a reason code: trading window closure period. Correspondingly, Stock exchanges restrict on-market transactions of IRs in the company’s equity shares and derivatives. 

Crucially, the article discusses provisions for additions, deletions, or updates to DP's and IRs’ details, to be implemented within 2 trading days following SEBI circular guidelines. It further provides for exemptions under Clause 4(3) of Schedule B read with Regulation 9 of the PIT Regulations, wherein freeze restrictions are lifted within 2 trading days upon company request, with automatic reinstatement post-exemption expiry.

Operationally, the freezing/de-freezing of PAN at the security level is executed post-market hours, ensuring settlement of prior transactions. Data sharing formats and timelines are to be standardized by depositories and exchanges, supported by operational guidelines for companies. Any discrepancies in data or implementation are to be jointly resolved by depositories, stock exchanges, and the listed entity, reinforcing compliance integrity. 

Definition Challenges of IRs and Family Drama

Though SEBI proposes extending this automated restriction to the IRs of DPs through a detailed procedure, building on its successful implementation for DPs, the definition of IRs under Regulation 2(f) of the PIT Regulations remains non-exhaustive. It includes a “spouse of a person,” “parent,” “sibling,” and “child of such person or of the spouse.” However, for any of these persons to qualify as an IR under the PIT Regulations, they must either be “dependent financially on such person” or be “consulted by such a person in taking decisions relating to trading in securities.”

The extension of the automated trading window closure to IRs of DPs raises concerns about the subjective nature of “financial dependence” and potential challenges in enforcement. The case of Shreejesh Harindranath and Sandeep A C (SpiceJet Limited case) highlights how individuals may argue non-dependence to evade insider trading restrictions. 

SEBI's order in the case is based on “trading patterns” rather than direct evidence of unpublished price sensitive information communication, inferring financial dependence to be often difficult to establish conclusively. A person could claim independence despite having economic ties, making enforcement circumstantial. While the new automated framework aims to close loopholes, it also brings in a grey area, where mere familial relationships could trigger restrictions even if financial dependence is unclear.

How Do You Decide “Financial Dependence” and “Consultation”?

The issue is exacerbated by the inherently subjective criteria of "financial dependence" and "consultation." In practice, proving or disproving financial ties or consultation habits becomes murky, especially in fragmented families or modern households where economic ties are informal and non-documented. The SpiceJet Limited case also reflects how SEBI relied not on direct communication evidence but on circumstantial trading patterns, establishing a precarious precedent where behavioural inferences substitute for concrete proof. This seems to leave room for false positives, unfairly implicating relatives with no mala fide intent or relation to be vulnerable to trading window closure. 

The Impact on Diligence by Board under Code of Fair Disclosure and Conduct

Primarily, the regulatory framework currently conflates IRs of DPs with DPs themselves, especially in many of listed entities' Codes of Fair Disclosure and Conduct. Even NSDL has put “immediate relatives” of designated persons, as designated persons. Even SEBI’s FAQ 22 clarifies the disclosure requirement under Regulation 7(2)(a) of PIT Regulations to apply not only to the designated person but their immediate relatives and any person for whom they take trading decisions, as clarified by Regulation 6(2). 

Question remains, whether immediate relatives already there under the category of “designated persons”, would be treated as “designated persons” or immediate relatives of designated person. Logically, if the circular comes in effect, immediate relatives of immediate relatives of designated person, might become vulnerable. 

Potentially, the current diligence framework happened due to lack of a framework, as companies started complying subjectively under Clause 4(1) of Schedule B, read with Regulation 9 of PIT Regulations, which mandates IRs and DPs to be restricted, and not IRs of DPs. This can complicate compliance systems, burden companies with excessive data mapping obligations, and raise concerns of privacy intrusion, especially where familial relationships are estranged, legally separated, or financially independent.

Potential Impact of Burden on the Board to Prove Inclusion of IRs under Restriction

The extension may inadvertently disincentivize listed companies from adopting nuanced Codes of Conduct, as they may resort to blanket inclusion of all potential IRs to avoid compliance risk, thereby increasing administrative friction. A more calibrated approach could involve clear thresholds for financial dependence (for example, percentage-based income contribution tests), mandatory disclosure declarations from DPs regarding dependent IRs, and safe harbour provisions for IRs demonstrating autonomous trading behaviour over a specified period.

For example: Singapore's Securities and Futures Act defines “Interest in securities”, where under Section 4(5), a corporation may deemed to have, an interest in a security if the person entitled to exercise or control the exercise of not less than 20% of the votes attached to the voting shares of the person, with 11 other clauses in nature of an exhaustive criteria. 

The Potential Data Intrusion Impact on Non-members of the Company 

Practical concerns arise over data security and PAN linkage, given the sensitive personal information of relatives now being fed into the compliance ecosystem, for even non-members of the company. This heightened surveillance could inadvertently infringe on the financial autonomy of adult family members who neither depend on nor consult with the DP, diluting the principles of personal freedom and market participation without cause.

Conclusion 

While the automated framework enhances enforcement efficiency, its blanket application to IRs, without refining definitional clarity and safeguarding individual autonomy risks regulatory overreach, compliance fatigue, and unjust restrictions on bona fide investors. Future clarification should focus on objective dependency criteria, carve-outs for independent IRs, and proportionality in enforcement.

Jurisdictions like the US adopt broad definitions of IRs focusing primarily on familial and household relationships, without expressly factoring in financial dependency tests or influence over trading decisions (SEC Rule 16a-1). Providing boards with ethical guidelines on when consultation for trading constitutes a conflict might standardize practices.